Pros and Cons of HSAs

Health savings accounts (HSAs) provide several tax advantages to people saving for future medical expenses. They also move with you if you change jobs, and unused funds roll over at the end of the year. However, to be eligible for an HSA, you must participate in a high deductible health plan (HDHP), which exposes you to potentially high medical bills. Another drawback is that HSAs can only be used for qualifying medical expenses, and violating that rule can mean steep penalties.

A financial advisor could help you put together a financial plan for your healthcare needs and goals in retirement.

HSA Basics

HSAs are special trust accounts that people can use in order to save for future medical costs. They offer a number of tax advantages. Contributions by employees or employers can be deducted from current income, and gains from interest or investments grow un-taxed. Later withdrawals are also tax-free if used for qualifying medical expenses, which can include doctor visits and hospital stays, prescription and over-the-counter medications, medical procedures and dental and vision care.

HSA rules stipulate that they are only available to people covered by high-deductible health plans. As of 2025, qualifying HDHPs must have deductibles of at least$1,650 for individuals and $3,300 for families. Maximum out-of-pocket expenses, including the deductible, can be as high as $8,300 for individuals and $16,600 for families.

HSA Pros

Tax advantages represent the biggest draw of HSAs. Contributions by employees, employers and family members do not count as currently taxable income for federal income tax purposes. That includes FICA taxes as well as federal income taxes. This gives HSA savers immediate tax savings. Further, taxpayers can claim HSA contributions as deductions even if they don’t itemize on their returns.

Tax-free growth means that interest and other gains on the funds in an HSA are also free of federal income taxes. Additionally, tax-free withdrawals allow savers to take out the money to pay qualified medical expenses without, again, incurring any federal income tax.

Another pro of HSAs is that they belong to the employee and can be kept through any number of job changes. The balance is not forfeited if it isn’t used in any given year and instead continues to increase through paycheck deductions and investments gains.

Also, HSAs aren’t subject to required minimum distributions (RMDs). That means retirees don’t have to take funds out of their HSAs unless they have qualified medical expenses they want to use the funds for.

HSA Cons

A woman and her healthcare provider discussing the pros and cons of HSAs.

A big drawback of an HSA is that you have to sign up for a high deductible health plan to be eligible for one. It is difficult to forecast medical expenses accurately. So a family hit with a surprise medical expenses could have to spend as much as $16,600 in out-of-pocket costs in a single year before insurance starts paying costs.

Further, tax-free HSA withdrawals are only permitted for qualified medical expenses. That can cover expenses like doctor bills, prescription medications and lab tests as well as insurance copays and co-insurance. However, it doesn’t include other health-related costs, such as gym memberships and cosmetic surgery.

If withdrawals are used to pay for non-qualified expenses, the IRS will levy a 20% penalty on the amount withdrawn. In addition, the withdrawals will be taxed as ordinary income. HSA users may have to keep detailed records showing that withdrawals were used for qualified expenses, or risk these penalties.

Other considerations include the fees that HSAs charge. These can add up over time, though they are generally much less in comparison to the potential tax savings that HSAs offer.

Another limitation of HSAs is that people who are covered by Medicare—which includes most people over age 65—cannot make contributions to their HSAs. However, they can keep their HSA and use the funds to pay future medical costs.

Finally, some states do not exempt HSA contributions from state income taxes. So while an HSA can save on federal income taxes, it may not help with state taxes.

Using an HSA for Your Retirement

An HSA can serve as a valuable part of your retirement strategy. Because contributions are tax-deductible and growth as well as qualified withdrawals are tax-free, HSAs are sometimes called “triple tax-advantaged” accounts. This makes them an efficient way to save for the high cost of healthcare in retirement.

One way to use an HSA for retirement is to help cover Medicare expenses. Once you turn 65, you can use HSA funds to pay for Medicare Part B and Part D premiums, as well as out-of-pocket costs such as deductibles and copayments. Long-term care insurance premiums also qualify, up to certain limits set by the IRS. These are expenses most retirees face, and using tax-free HSA dollars to cover them can ease the burden on your other retirement accounts.

After age 65, you can also use HSA withdrawals for non-medical expenses without facing the 20% penalty that applies to younger account holders. While these withdrawals are still taxed as ordinary income, this effectively makes the HSA function like a traditional IRA once you reach retirement age. This flexibility allows you to use the account both as a dedicated healthcare fund and as a supplemental retirement account if your medical expenses are lower than expected.

Another advantage of HSAs in retirement is that they are not subject to RMDs. Unlike traditional IRAs or 401(k) plans, you are not forced to withdraw funds at a certain age. This gives you more control over when and how you spend the money, allowing the balance to continue growing tax-free for as long as you choose to keep it invested. For retirees who do not need to tap their HSA immediately, this can be an effective way to preserve assets.

Finally, building an HSA balance early in your career can create a significant resource for later years, when healthcare costs tend to rise. Many retirees face expenses for prescriptions, hospital stays, dental care, vision care and long-term care. By treating your HSA as both a medical savings account and a long-term retirement tool, you can prepare for these costs while enjoying tax advantages along the way.

Bottom Line

There are several pros and cons of HSAs.

HSAs present nearly unmatched tax advantages over other savings tools, and can help significantly to pay for future medical costs. They are portable, don’t expire and can be used to pay for many health-related expenditures. However, to get one people have to join high-deductible health plans, which expose them to potentially steep healthcare bills. And should withdrawals be used to pay for anything other than qualified health costs, the penalties are severe.

Tips on Paying for Healthcare

A financial advisor can help you put a financial plan into action for your healthcare needs. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
HSAs are generally seen as most attractive for younger, healthier people who don’t spend a lot on healthcare. Older people and those with chronic conditions that result in large health costs may be better off with traditional insurance that has no HSA but a lower deductible.